Interaction of Fiscal Policies on the Euro Area: How Much Pressure on the ECB?
AbstractSince the Helsinki European Council of December 1999, a process of increased coordination of fiscal policies in the area of the Euro seems to be on its way. In this paper I examine this process from the point of view of the independence of the European Central Bank (ECB). The interaction of the governments and the ECB is addressed in a game theoretical framework. First, the conditions under which the national governments are able to put pressure on the ECB are made explicit. Then the main question is addressed: would a greater fiscal coordination reduce or increase the capacity of the monetary authority of targeting long run inflation? Formal and informal, discretional (positive) and rule-based (negative) coordination and their interactions are examined as possible solutions of the game. I conclude that the main point is not how much fiscal coordination is there, but the form it takes. It turns out that a mix of informal political coordination and binding rules is the one that best preserves the independence of the ECB. For negative coordination, it is shown that a simple change in the definition of "excessive deficit" can at the same time allow more stabilization of output after a shock and a better control of inflation by the ECB.
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Bibliographic InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2006/9.
Date of creation: 2006
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European Montary Union; European Central Bank; game theory; fiscal policy; monetary policy; policy coordination;
Find related papers by JEL classification:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- E0 - Macroeconomics and Monetary Economics - - General
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- H5 - Public Economics - - National Government Expenditures and Related Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-05-20 (All new papers)
- NEP-CBA-2006-05-20 (Central Banking)
- NEP-EEC-2006-05-20 (European Economics)
- NEP-MAC-2006-05-20 (Macroeconomics)
- NEP-MON-2006-05-20 (Monetary Economics)
- NEP-PBE-2006-05-20 (Public Economics)
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